Student Loan Default Rates Increase

Borrowers at for-profit schools represent growing share of defaults.

U.S. Secretary of Education Arne Duncan announced that the fiscal year 2008 national student loan default rate is 7%, up from 6.7% as of fiscal year 2007.

The default rates increased from 5.9% to 6% for public institutions, from 3.7% to 4% for private institutions, and from 11% to 11.6% for for-profit schools.

The default rate is a snapshot in time, representing borrowers whose first loan repayments came due between Oct. 1, 2007, and Sept. 30, 2008, and who defaulted before September 30, 2009.

During this time, almost 3.4 million borrowers entered repayment, and more than 238,000 defaulted on their loans. They attended 5,860 participating institutions. Borrowers who default after their first two years of repayment aren’t measured as defaulters in today's data.

“This data confirms what we already know: that many students are struggling to pay back their student loans during very difficult economic times,” Duncan said. “That's why the Administration has expanded programs like income-based repayment and Pell grants to help students in financial need.

“The data also tells us that students attending for-profit schools are the most likely to default,” Duncan continued. “While for-profit schools have profited and prospered thanks to federal dollars, some of their students have not. Far too many for-profit schools are saddling students with debt they cannot afford in exchange for degrees and certificates they cannot use. This is a disservice to students and taxpayers, and undermines the valuable work being done by the for-profit education industry as a whole.”

In award year 2008-2009, students at for-profit schools represented 26% of the borrower population and 43% of all defaulters. The median federal student loan debt carried by students earning associate degrees at for-profit institutions was $14,000. The majority of students at community colleges do not borrow.

This rapid growth of enrollment, debt load, and default rates at for-profit schools in recent years prompted the Obama Administration to embark on a year-long negotiation with the higher education community to develop a set of proposals that strengthen the integrity of the federal student aid programs and ensure that taxpayer funds are used appropriately.

Thirteen issues, addressed in a proposed regulation published June 16, aim to protect students from misleading and overly aggressive recruiting practices, provide consumers with better information about the effectiveness of career college programs, and ensure that only eligible students and programs receive aid.

Another proposed regulation, published July 26, further aims to protect students from debt they can’t repay by requiring for-profit institutions to better prepare students for "gainful employment" or risk losing access to federal student aid.

Both student debt levels and incomes after program completion are taken into consideration. The department is now developing final regulations on these issues, which it expects to publish in the coming months.

Under current rules, all schools with default rates of 25% or greater for three consecutive years face loss of eligibility in the federal student aid programs.